Closing The Debt-Driven Fiscal Gap Just Got A Lot Harder

Since 2005, the Congressional Budget Office has published an annual report on the long-term sustainability of U.S. fiscal policies. The CBO measures fiscal sustainability by estimating the fiscal gap — the change in savings required to stabilize the debt-to-GDP ratio. The most recent CBO estimate of the fiscal gap is 1.9% of GDP; at that rate, it would take 30 years to stabilize America's debt-to-GDP ratio.

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The CBO concludes that fiscal policies are not sustainable under current law and that closing the fiscal gap requires the implementation of multiple fundamental fiscal reforms — most important among these, entitlement reforms.

The CBO's "Long Term Forecasts" have been criticized for not using dynamic scoring to capture the positive impact on economic growth made by free-market policy reforms, such as the recently passed Tax Cuts and Jobs Act.

But there is a more basic problem with the CBO's forecasts: The CBO estimates the fiscal gap based on budgeted federal spending and revenues.

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In our research, we simulate total federal spending based on historical data that include emergency spending as well as budgeted spending. Emergency spending includes various off-budget expenditures, including for military conflicts, natural hazards, and financial crisis responses. Including projections for these expenses likely makes our analysis more accurate than the CBO's.

Because the U.S. is now a major debtor nation, closing the fiscal gap will be a formidable challenge. Fiscal rules would have to cap the growth in federal spending to less than 1% per year over this 30-year period.

Further, we estimate the fiscal gap is about twice as large as the CBO's estimate. To maintain the current debt-to-GDP ratio, the federal government would have to save about $700 billion per year.

Closing the fiscal gap requires not only a fundamental reform of entitlement programs, but also the creation of some unorthodox fiscal policies. In our research, we explore potential savings from the privatization of federal programs, the sale of federal assets, and the devolution of federal programs to state and local governments, where they can be administered more efficiently.

Making matters even worse, closing the fiscal gap just got a lot harder due in part to the passage of the Tax Cuts and Jobs Act and the March omnibus spending bill, which will increase deficits and debt over the long term, accompanied by higher interest rates.

Fortunately, we have learned a lot from the experience of other Organization for Economic Cooperation and Development countries that have successfully started to address their own debt crises. Closing the fiscal gap requires new fiscal rules that will combine an expenditures cap and balance the budget during the business cycle.

In some countries, such as Sweden, these rules were enacted by their elected representatives in a national legislature; in other countries, such as Switzerland, the rules were enacted by citizens through initiatives and referendums.

We don't believe U.S. citizens will continue to sit back and watch Congress incur deficits and accumulate debt until the country reaches the brink of insolvency. If Congress fails to enact fiscal rules imposing fiscal discipline, citizens will likely take things into their own hands.

The U.S. Constitution does not provide for an initiative or referendum, but Article V of the Constitution gives citizens, as well as Congress, the power to amend the Constitution. Twenty-eight states have approved a resolution calling for an Article V convention to incorporate a balanced-budget amendment into the Constitution. As citizens approach the 34-state threshold needed to call the convention, we anticipate Congress will propose a balanced-budget amendment — if for no other reason than to preserve its prerogative in proposing amendments.

Passage of a balanced-budget amendment would set the stage for other fiscal rules that would impose discipline on the out-of-control federal government, thereby restoring the balance of power to the states and the people.

Merrifield ([email protected]) is professor of economics at the University of Texas-San Antonio.

Poulson is emeritus professor of economics at the University of Colorado-Boulder. Both professors are policy advisors at the Heartland Institute.

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